The housing market remains a bundle of contradictions as prices rise and sales decline. For the first time ever, the median home price hit $400,000 in May, as Zillow reports home affordability fell to a 15-year low.
The National Association of Realtors (NAR) reports that existing-home sales declined in May for the fourth straight month, falling 3.4% from April. Over the last 12 months, sales have declined by 8.6%.
At the same time, buyers continue to pay more for homes. In May, the NAR found that the median home price for all types of dwellings, including condos, was a record $407,600, 14.8% higher than in May 2021. Prices increased in all regions of the country.
‘Purchase power has dwindled’
Not surprisingly, Zillow found that more Americans are being priced out of the housing market. A bigger factor than the listing price is the cost of borrowing money.
"Mortgage rates took an unprecedented leap skyward over the past two weeks and quickly multiplied housing costs as they rose," said Zillow economist Nicole Bachaud. "We are already seeing signs of waning demand, and expect these recent rate hikes to quicken the market's needed rebalancing. While shoppers will likely experience less competition for homes than the frenzied recent months, their purchasing power has dwindled."
That’s because incomes are not keeping up with rising monthly payments, which are influenced by a combination of elevated home prices and higher mortgage rates. Inflation is cutting into incomes even more.
According to Zillow, monthly house payments are taking about 28% of homeowners' monthly income, which is dangerously close to the recommended 30% threshold.
Six months ago, a home buyer with good credit could get a mortgage rate of about 3%. But mortgage rates have shot up in early June, averaging 5.78% as of Thursday, according to Zillow. A new purchase of a typical U.S. home at that rate would mean monthly mortgage payments of $2,127. That's more than 50% higher than 12 months ago.
Not enough homes for sale
The lack of available homes for sale is a major reason that home prices continue to rise, even as sales decline. The NAR reports that total housing inventory at the end of May experienced a sharp increase from April but was down 4.1% from May 2021.
Lawrence Yun, the NAR’s chief economist, says sales appear lower in comparison to the last two years but are actually returning to pre-pandemic levels.
"Also, the market movements of single-family and condominium sales are nearly equal, possibly implying that the preference towards suburban living over city life that had been present over the past two years is fading with a return to pre-pandemic conditions," he said.